SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended November 30, 1997 Commission File Number 0-1738
GENERAL KINETICS INCORPORATED
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Virginia 54-0594435
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
14130-A Sullyfield Circle, Chantilly, VA 20151
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code 703-802-4848
------------
Indicate by checkmark whether the Registrant
(1) has filed all reports required to be
filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter
period that the Registrant was required to
file such reports), and (2) has been subject
to such filing requirements for the past 90
days.
Yes X No
--- ---
The number of shares of Registrant's Common Stock
outstanding as of January 5, 1998 6,718,925 Shares
INDEX
PAGE NO.
--------
Cautionary Statement Under the Private Securities
Litigation Reform Act of 1996..............................3
Part I - Financial Information
Item I - Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
November 30, 1997 and May 31, 1997........................4
Condensed Consolidated Statements of Operations -
Three Months and Six Months Ended November 30, 1997
and November 30, 1996, respectively........................5
Condensed Consolidated Statements of Cash Flows -
Three Months and Six Months Ended November 30, 1997
and November 30, 1996, respectively........................6
Notes to Condensed Consolidated Financial Statements.......7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................10
Part 2 - Other Information
Item 6 - Exhibits and Reports on Form 8-K..........................13
2
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996
Statements in this Quarterly Report on Form 10-Q under the caption "Business"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations", as well as oral statements that may be made by the Company or by
officers, directors or employees of the Company acting on the Company's behalf,
that are not historical fact constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements involve risks and uncertainties, including, but not limited to, the
risk that the Company may not be able to obtain additional financing if
necessary; the risk the Company may in the future have to comply with more
stringent environmental laws or regulations, or more vigorous enforcement
policies of regulatory agencies, and that such compliance could require
substantial expenditures by the Company; the risk that the Company may not be
able to continue the necessary development of its operations on a profitable
basis; and the risk that the Company's Common Stock will not continue to be
quoted on the OTC Bulletin Board services. In addition, the Company's business,
operations and financial condition are subject to substantial risks which are
described in the Company's reports and statements filed from time to time with
the Securities and Exchange Commission, including the Company's annual report of
Form 10-K, as amended, for the fiscal year ended May 31, 1997, and this Report.
PART I FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
The unaudited consolidated financial statements of General Kinetics
Incorporated ("GKI" or the "Company") set forth below have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in the annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and
regulations. The Company believes that the disclosures made are adequate to make
the information presented not misleading.
In the opinion of management of the Company, the accompanying
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) that are necessary for a fair presentation of
results for the periods presented. It is suggested that these consolidated
financial statements be read in conjunction with the audited financial
statements for the fiscal years ended May 31, 1997 and 1996 set forth in the
Company's annual report on Form 10-K, as amended, for the fiscal year ended May
31, 1997.
3
General Kinetics Incorporated
Balance Sheets
November 30, May 31,
1997 1997
(Unaudited) (Audited)
----------- ---------
Assets
------
Current Assets:
Cash and cash equivalents $ 731,300 $ 1,482,300
Accounts receivable, net of allowance, $208,000 1,026,800 1,011,000
Inventories 1,150,200 649,500
Prepaid expenses and other 31,200 20,000
Note Receivable, current 200,000 200,000
Note Receivable, affiliate 175,000 150,000
-------- -------
Total Current Assets 3,314,500 3,512,800
---------- ---------
Property, Plant and Equipment 4,663,800 4,712,100
Less: Accumulated Depreciation (3,382,800) (3,463,100)
----------- -----------
1,281,000 1,249,000
Note Receivable, less current portion 550,000 550,000
Other Assets 4,200 22,100
------ ------
Total Assets $ 5,149,700 $ 5,333,900
============ ===========
Liablilities and Stockholders' Deficit
--------------------------------------
Current Liabilities:
Current maturities of long-term debt 103,000 160,300
Accounts payable, trade 616,500 635,500
Accrued expenses and other payables 617,900 646,600
-------- -------
Total Current Liabilities 1,337,400 1,442,400
---------- ---------
Long-Term debt - less current maturities (including
$8,942,500 and $8,956,400 due to controlling shareholder) 9,653,700 9,679,300
Other long-term liabilities 265,800 285,000
-------- -------
Total Long-Term Liabilities 9,919,500 9,964,300
---------- ---------
Total Liabilities 11,256,900 11,406,700
----------- ----------
Stockholders' Deficit:
Common Stock, $0.25 par value, 50,000,000 shares 1,811,500 1,796,500
authorized, 7,245,557 shares issued, 6,718,925
shares outstanding
Additional Contributed Capital 7,239,400 7,224,400
Accumulated Deficit (14,707,900) (14,643,500)
------------ ------------
(5,657,000) (5,622,600)
Less: Treasury Stock, at cost (526,632 shares) (450,200) (450,200)
--------- ---------
Total Stockholders' Deficit (6,107,200) (6,072,800)
----------- -----------
Total Liabilities and Stockholders' Deficit $ 5,149,700 $ 5,333,900
============ ===========
The accompanying notes are an integral part of the above statements.
Page 4
General Kinetics Incorporated
Statements of Operations
Six Months Ended Three Months Ended
November 30, November 30, November 30, November 30,
1997 1996 1997 1996
---- ---- ---- ----
Net Sales $ 2,941,800 $ 4,579,400 $ 1,663,100 $ 2,011,000
Cost of Sales 2,139,400 3,279,600 1,188,200 1,425,300
----------- ----------- ----------- -----------
Gross Profit 802,400 1,299,800 474,900 585,700
----------- ----------- ----------- -----------
Selling, General & Administrative 738,900 840,300 382,300 391,300
Product Research, Development & Improvement -- 59,100 - --
----------- ----------- ----------- -----------
Total Operating Expenses 738,900 899,400 382,300 391,300
----------- ----------- ----------- -----------
Operating Income (loss) 63,500 400,400 92,600 194,400
Interest Expense 127,900 202,000 60,000 96,600
----------- ----------- ----------- -----------
Income (loss) from continuing operations (64,400) 198,400 32,600 97,800
Loss from discontinued operations -- (274,700) -- (237,900)
----------- ----------- ----------- -----------
Net Income (loss) $ (64,400) $ (76,300) $ 32,600 $ (140,100)
=========== =========== =========== ===========
Net Income (loss) per share:
Income (loss) from continuing operations $ (0.01) $ 0.008 $ 0.001 $ 0.004
Income (loss) from discontinued operations -- (0.011) - (0.009)
----------- ----------- ----------- -----------
Net Income (loss) per share $ (0.01) $ (0.003) $ 0.001 $ (0.005)
=========== =========== =========== ===========
Weighted Average Number of Common Shares
and Dilutive Equivalents Outstanding 6,718,925 25,508,925 25,508,925 25,508,925
=========== =========== =========== ===========
The accompanying notes are an integral part of the above statements.
Page 5
General Kinetics Incorporated
Statements of Cash Flows
Six Months Ended
November 30, November 30,
1997 1996
---- ----
Cash Flows From Operating Activities:
Net Income/(Loss) $ (64,400) $ (76,300)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 81,500 74,500
Amortization of bond discount 32,300 32,300
(Increase) Decrease in Assets:
Accounts Receivable (15,800) (726,200)
Inventories (500,700) 453,400
Prepaid Expenses (11,200) (107,300)
Other assets 17,900 5,000
Increase (Decrease) in Liabilities:
Accounts Payable - Trade (19,000) 255,900
Accrued Expenses (28,700) 3,600
Other Long Term Liabilities (19,200) (19,700)
---------- -----------
Net cash provided by/(used) in Operating Activites (527,300) (104,800)
---------- -----------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (113,500) (31,500)
Change in assets held for sale -- 75,300
Issuance of Notes Receivable (25,000) --
---------- -----------
Net cash provided by/(used) in Investing Activities (138,500) 43,800
---------- -----------
Cash Flows from Financing Activities:
Advances from Factor/Borrowings
on Demand Notes Payable -- 1,543,900
Repayments of Advances from Factor/
Demand Notes Payable -- (1,420,600)
Borrowings on Long Term Debt -- --
Repayments on Long Term Debt (85,200) (106,900)
---------- -----------
Net cash provided by/(used) in Financing Activities (85,200) 16,400
---------- -----------
Net (decrease) increase in cash and cash equivalents (751,000) (44,600)
Cash and Cash Equivalents: Beginning of Period 1,482,300 364,100
---------- -----------
Cash and Cash Equivalents: End of Period $ 731,300 $ 319,500
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 137,800 $ 154,800
Income Taxes 800 --
Supplemental Disclosures of Non Cash Investing
and Financing Activities:
Increase in assets held for sale -- $ 75,300
The accompanying notes are an integral part of the above statements.
Page 6
GENERAL KINETICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation
The condensed consolidated financial statements at May 31, 1997, and
for the three months and six months ended November 30, 1997, and November 30,
1996, respectively, include the accounts of General Kinetics Incorporated
("GKI").
The financial information included herein is unaudited. In addition,
the financial information does not include all disclosures required under
generally accepted accounting principles in that certain note information
included in the Company's Annual Report has been omitted; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary to a fair
presentation of the results of the interim periods.
The results of operations for the three month and six month periods
ended November 30, 1997, are not necessarily indicative of the results to be
expected for the full year.
Note 2 - Discontinued Operations
As of December 5, 1996, GKI completed the sale of the business of its
secure communications division ("SCD") to Cryptek Secure Communications, LLC
("Cryptek"), a Delaware limited liability company, the majority of whose equity
interests are owned by affiliates of Angelo Gordon & Co., L.P. As of May 30,
1997, the Company sold the stock in its wholly owned Food Technology Corporation
("FTC") subsidiary to the former Vice President and general manager of FTC. Both
SCD and FTC had experienced operating losses during the prior fiscal year.
The statements of operations for the quarter and six months ended November
30, 1996 has been restated and the operating results of SCD and FTC are shown
separately as part of discontinued operations. The net loss for SCD was $205,900
and $240,700 on net sales of approximately $774,700 and $1,625,600 for the
quarter and six months ended November 30, 1996, respectively. The net loss for
FTC was $32,000 and $34,000 on net sales of approximately $76,900 and $147,500
for the quarter and six months ended November 30, 1996, respectively. The total
net loss from discontinued operations was $237,900 and $274,700 for the quarter
and six months ended November 30, 1996, respectively.
7
Note 3 - Net Income/(Loss)Per Share
Primary and fully diluted net earnings/(loss) per share have been computed
using the weighted average number of common shares and common equivalent shares
outstanding, to the extent dilutive. Common equivalent shares consist of
approximately 19 million shares issuable upon conversion of Convertible
Subordinated Debentures issued to the Company's principal shareholder, Rabo
Investment Management Ltd. ("Rabo"), formerly Gutzwiller & Partner, AG. Due to
the loss for the six months ended November 30, 1997, the outstanding stock
options and convertible debentures issued to Rabo are not considered dilutive
and therefore no effect is given to them as common stock equivalents during that
period. Net income for the period was adjusted for the elimination of interest
expense for the convertible debt, net of applicable income taxes, while the
average number of shares of common stock and common stock equivalents were
increased.
Note 4 - Notes Payable
At November 30, 1997 and May 31, 1997 convertible debentures initially issued to
Rabo have an aggregate principal amount of $9.4 million, mature in August 2004,
are convertible into common stock at a conversion price of 50 cents per share,
and bear interest at 1% per annum, which is payable annually. Shares issuable
upon conversion are also subject to certain rights to registration under the
Securities Act of 1933, as amended.
Other Real Estate Mortgage Loans
The Company was in violation of certain loan covenants of the real estate
mortgage agreement on the Company's Johnstown facility as of November 30, 1997,
however, the lender has agreed to waive the violations through May 31, 1998.
Note 5 - Notes Receivable
The Company did not receive as scheduled in December 1997 the $200,000 first
installment of the principal due from Cryptek on the $750,000 secured promissory
note which formed a portion of the consideration received from Cryptek in the
disposition of the Company's secure communications business in December 1996.
Representatives of the Company and Cryptek are discussing certain issues
relating to that disposition, which Cryptek believes may be relevant to such
payment, but the Company does not believe
8
that there is any basis for non-payment. Principally due to this belief and the
fact that the note is partially secured by certain inventory and fixed assets of
Cryptek, the accompanying financial statements at November 30, 1997 do not
include a valuation reserve for the Cryptek note.
Note 6 - Recent Accounting Pronouncements
On March 3, 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share (SFAS 128)". SFAS
128 provides a different method of calculating earnings per share than is
currently used in accordance with APB Opinion 15. SFAS 128 provides for the
calculation of Basic and Diluted earnings per share. Basic earnings per share
includes no dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of securities
that could share in the earnings of an entity, similar to existing fully diluted
earnings per share. Using the principles set forth in SFAS 128, Basic earnings
per share would have been $0.005 and ($0.01) per share for the three months and
six months ended November 30, 1997, respectively, and ($0.02) and ($0.01) for
the three months and six months ended November 30, 1996, respectively. Diluted
earnings per share would have been ($0.001) and ($0.003) per share for the three
months and six months ended November 30, 1997, respectively, and ($0.005) and
$0.003 for the three months ended November 30, 1996, respectively. The Company
will adopt the provisions of SFAS 128 in the quarter ending February 28, 1998.
Note 7 - Income Taxes
The Company's estimated effective tax rate for fiscal 1998 is 0%. This estimated
effective tax rate is lower than the statutory rate due to the existence of net
operating loss carryforwards.
9
GENERAL KINETICS INCORPORATED
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended November 30, 1997, Compared to Three Months Ended
- --------------------------------------------------------------------
November 30, 1996
- -----------------
Continuing Operations
Net sales for continuing operations for the three months ended November 30,
1997 were approximately $1.7 million compared to net sales of approximately $2.0
million for the quarter ended November 30, 1996. The decrease in sales was due
primarily to a decrease in demand for the three months ended November 30, 1997
as compared to the same period of the prior fiscal year. The gross margin
percentage decreased from 29.1% for the quarter ended November 30, 1996 to 28.6%
for the quarter ended November 30, 1997. The decrease was principally due to the
decrease in sales for the corresponding periods. However, the contract backlog
increased from approximately $2.4 million at November 30, 1996 to approximately
$2.8 million at November 30, 1997.
Sales, General & Administrative costs were approximately $382,400 in the
second quarter of fiscal 1998 as compared to approximately $391,300 in the
second quarter of the prior fiscal year. This decrease was principally due to a
decrease in corporate overhead due to the sale of the secure communications
business.
For the three months ended November 30, 1997, the Company had operating
income from continuing operations of approximately $92,600 compared to an
operating income of $194,400 for the comparable quarter of the prior year. The
decrease was due principally to the decrease in sales in the second quarter of
fiscal 1998 in the as compared to the corresponding period in the prior fiscal
year.
Interest expense decreased from $96,600 in the second quarter of fiscal 1997
to $60,000 in the second quarter of fiscal 1998. This decrease occurred
principally because the Company factored accounts receivable in the prior fiscal
year, but did not factor accounts receivable in the quarter ended November 30,
1997.
The Company's estimated effective tax rate for fiscal 1998 is 0%. This estimated
effective tax rate is lower than the statutory rate due to the existence of net
operating loss carryforwards.
Discontinued Operations
10
The three months ended November 30, 1996 included losses from discontinued
operations totaling $237,900. The net loss in the secure communications division
was $205,900 on net sales of approximately $774,700, and the net loss for Food
Technology Corporation was $32,000 on net sales of approximately $76,900 for the
quarter ended November 30, 1996.
Six Months Ended November 30, 1997, Compared to Six Months Ended
- ----------------------------------------------------------------
November 30, 1996
- -----------------
Continuing Operations
Net sales for continuing operations for the six months ended November 30, 1997
were approximately $2.9 million compared to net sales of approximately $4.6
million for the six months ended November 30, 1996. The decrease in sales was
due primarily to a decrease in demand for the six months ended November 30, 1997
as compared to the same period of the prior fiscal year. Management does not
believe that the decrease in demand experienced in the first six months of
fiscal 1998 necessarily represents a continuing trend. The contract backlog
increased from approximately $1.3 million at May 31, 1997 to approximately $2.8
million at November 30, 1997. The gross margin percentage decreased slightly,
from 28.4% for the six months ended November 30, 1996 to 27.3 for the six months
ended November 30, 1997. The decrease was principally due to the decrease in
sales for the corresponding periods.
Sales, General & Administrative costs were approximately $738,900 in the
first six months of fiscal 1998 as compared to approximately $840,300 in the
first six months of the prior fiscal year. This decrease was principally due to
a decrease in corporate overhead due to the sale of the secure communications
business.
For the six months ended November 30, 1997, the Company had operating income
from continuing operations of $63,500 compared to a operating income of $400,400
for the comparable six months of the prior year. The decrease was due
principally to the decrease in sales and a small decrease in the gross profit
margin in the first six months of fiscal 1998 in the as compared to the
corresponding period in the prior fiscal year.
Interest expense decreased from $202,000 in the first six months of fiscal
1997 to $127,900 in the first six months of fiscal 1998. This decrease occurred
principally because the Company factored accounts receivable in the prior fiscal
year, but did not factor accounts receivable in the six months ended November
30, 1997.
Discontinued Operations
The six months ended November 30, 1996 included losses from discontinued
operations totaling $274,700. The net loss in the secure communications division
was $240,700 on net sales of approximately $1,625,600, and the net
11
loss for Food Technology Corporation was $34,000 on net sales of approximately
$147,500 for the six months ended November 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of December 5, 1996, GKI completed the sale of the business of its secure
communications division ("SCD") to Cryptek Secure Communications, LLC
("Cryptek"), a Delaware limited liability company, the majority of whose equity
interests are owned by affiliates of Angelo Gordon & Co., L.P. As of May 30,
1997, the Company sold the stock in its wholly owned Food Technology Corporation
("FTC") subsidiary to the former Vice President and general manager of FTC. Both
SCD and FTC had experienced operating losses during the 1997 fiscal year.
The Company has suffered recurring losses from operations, including a small
loss for the six months ended November 30, 1997, and has a net capital
deficiency that raise substantial doubt about the Company's ability to continue
as a going concern. However, the operating results for fiscal 1997 showed
significant improvement over the prior three fiscal years.
There was net income of $32,600 in the second quarter of fiscal 1998, which
reduced the net loss to $64,400 for the six months ended November 30, 1997.
Management believes that the results of operations for the six month period
ended November 30, 1997 are not necessarily indicative of the results to be
expected for the full year. The contract backlog has increased from
approximately $1.3 million at May 31, 1997 to approximately $2.8 million at
November 30, 1997. The Company must continue to market electronic enclosure
products to government and commercial markets, and enter into contracts which
the Company can complete with favorable profit margins in order to return to
profitably for the remainder of fiscal 1998.
The Company did not receive as scheduled in December 1997 the $200,000 first
installment of the principal due from Cryptek on the $750,000 secured promissory
note which formed a portion of the consideration received from Cryptek in the
disposition of the Company's secure communications business in December 1996.
Representatives of the Company and Cryptek are discussing certain issues
relating to that disposition, which Cryptek believes may be relevant to such
payment, but the Company does not believe that there is any basis for
non-payment. Principally due to this belief and the fact that the note is
partially secured by certain inventory and fixed assets of Cryptek, the
accompanying financial statements at November 30, 1997 do not include a
valuation reserve for the Cryptek note.
The Company has outstanding debentures originally issued to Gutzwiller &
Partner, A.G., now Rabo Investment Management Ltd. ("Rabo") totaling $9.4
million. The debentures mature in August 2004, are convertible into common stock
at a conversion price of 50 cents per share, and bear interest at 1% per annum
payable annually.
12
In June 1993, the Company entered into a factoring agreement with Reservoir
Capital Corporation ("Reservoir") in which Reservoir agreed to purchase eligible
Accounts Receivable from the Company at an assignment price equal to 80% of the
outstanding amount of such accounts receivable. The factoring agreement with
Reservoir was renewed in December 1994, and continues on a month-to-month basis.
At November 30, 1997, there was no balance due Reservoir. The Company does not
expect to continue to draw on this credit facility, but it is available in the
future to alleviate short-term cash requirements.
As of November 30, 1997, the Company had a balance of approximately $731,300
million in cash and cash equivalents. Management believes that cash on hand and
careful management of operating costs and cash disbursements should enable the
Company to meet its cash requirements through May 31, 1998.
Analysis of Cash Flows
Operating activities used approximately $527,300 in cash in the first half of
fiscal 1998. This reflects a net loss of $64,400 plus $576,700 in cash to fund
changes in working capital items, offset by $113,800 in non-cash expenses. The
increase in cash used to fund working capital items was principally due to an
increase in inventories of $500,700 during the six months ended November 30,
1997. This increase in inventories was due to the increase in contract backlog
on November 30, 1997 as compared to May 31, 1997.
Investing activities used $138,500 in the first half of fiscal 1998. The Company
acquired property, plant and equipment totaling $113,500, which consisted
primarily of hardware and software for an upgraded accounting and MIS system.
Financing activities used $85,200 in the six months ended November 30, 1997,
which was used to repay certain long-term real estate debt.
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(b) Reports of Form 8-K
None
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL KINETICS INCORPORATED
Date: January 14, 1998 /s/ Larry M. Heimendinger
-------------------------- --------------------------------
Chairman of the Board
(Principal Executive Officer)
Date: January 14, 1998 /s/ Sandy B. Sewitch
-------------------------- --------------------------------
Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer)
14